Exchange 2010 - LAN users being prompted for username/password

Got an issue with a fresh Exchange 2010 install. One Exchange server with all roles installed.

When users open up their Outlook client (Outlook 2007), they are continually prompted for their username/password. Further more... it will not accept their correct credentials, and you have no choice other then to hit cancel a few times and then Outlook works as usual. They will continue to get prompted sporadically throughout the day.

We have correctly configured Autodiscover and installed a valid SAN cert with all the correct names. OWA, activesync and Outlook Anywhere (for users outside the office) all work fine. This only effects local LAN users on the Domain.

At a loss, I opened a Microsoft support case and have been working with them for 4 days now... and they themselves are currently stumped.

After a week of troubleshooting; here's what we know....

1) Any user running a Outlook 2010 client, do not get prompted and work fine.
2) Any member of the "Domain Admins" group do not get prompted and work fine.

The above are obviously not valid solutions....but a "work around" so to speak found solely through troubleshooting.

I am posting this question here, if not for anything else, for chronicling purposes to look back on when this issue inevitably raises its head for another client and to help out all those who I know are experiencing this same issue as well.

If you have any comments or suggestions that may aid in resolving this ... I'd love to hear them!

Who is Participating?

Well after working with MS for 8 days... the last thing we did that finally seemed to suppress the pop up login box was to assign READ & EXECUTE, LIST FOLDER CONTENTS and READ permissions to the "Program Files\Microsoft\Exchange Sever\V14\ClientAccess" folder for the "Authenticated Users" group.
This seemed like an odd solution to this problem, but alas, it is fixed now, users are happy, I am happy; so I'll leave well enough alone for now.

Thank you very much for all your help and suggestions Sunny, I appreciate it. Hopefully, this will help someone else one day.

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FYI - performing this solution and then doing an iisreset caused all Exchange clients to disconnect (yikes!). Restarting the server caused everything to come back up and the authentication pop-up issue window to resolve. Thank you much to Italia_NYC for going through the pain to resolve this horrific issue!